The Ever Given Aftermath: Global Ocean Freight & Salvage Experts Weigh In

Introduction

Anders Schulze : Good morning. Good afternoon, everyone. Welcome to this logistics webinar around the Ever Given aftermath. My name is Anders Schultze and I'm the global head of ocean freight here at Flexport. I'm super excited to spend the next 15 minutes or so with all of you around a quick update on the situation and the outlook ahead of us with the aftermath.

We're all acutely aware of the eventful past couple of days in global trade. For almost a full week, the Ever Given was blocking the Suez Canal. Basically holding back almost 15% of the global trade. Nearly 500 vessels were waiting to pass the Suez Canal in both directions, including more than half a million of the containers onboard container ships.

There's a lot of guesstimates out there, but I think it's safe to say that this event alone costs more than $60 billion. Fortunately, we all got good news on Sunday night when the vessel was free, but now we're left with a massive aftermath out there.

Today I'm being joined by two phenomenal, freight experts in both, ocean freight operations and ocean salvage. First off, welcome to David Sterling CEO of the Sterling Salvage. David is one of the leading ocean salvage experts out there. So super excited to pick your brain David from your extensive experience. Also welcome to our very own Nathan Strang Head up the Ocean Freight Operations in North America here at Flexport.

Let's dive in over to you, David. We've all been following the news intensely a lot of information out there, but help us understand what really happened here.

Ever Given Aftermath: What happened?

David Stirling : Hello everyone. Good morning. Good afternoon, depending on where you are. We've heard quite a few reports of what the causes were ranging from mechanical breakdowns and wind and gusting winds and to visibility. I think to be fair most incidents, it's a combination of various effects. If you could imagine a vessel, the size of the Ever Given from the water line up to the top of the bridge is probably 60 meters, 200 feet. Yes. It was a huge sail area there, and if the wind is coming from directly a beam from the side the wind loading alone on the containers and the vessel must be something around 300 tons.

So trying to maintain a vessel of that size in the center of a channel with these weather conditions, gusty winds poor visibility is quite a challenging, challenging task for any pilot or ship master. The other contributing to factors what's known by shipmasters people who handle ships regularly is called the bank effect. And based on an old principal, that was a, that was discovered back in the 18th century by a physicist called Bernoulli. And the principle is when a medium, such as water or air increases speed, it causes a suction effect. And we see that quite regularly on an aircraft. So the aircraft wing causes the air speed to increases, it goes over the top of the wing and the suction effect lifts the aircraft into the air.

In the context of a ship, it works in two ways. The most common is called squat. So when a ship is in a narrow channel and there's a small under keel clearance, the water accelerates underneath the keel as it accelerates, it creates a suction effect and the ship gets deeper and deeper in the water, depending on how fast it's going. And that causes the ship sometimes to touch the bottom or to ground while it's steaming along.

The other way that it affects a vessel is at the sides. When a vessel is passing through a canal, the water is displaced and the water runs down the side of the ship and it has to accelerate to get past the vessel. And this causes a low pressure or suction area at the sides of the ship.

When the ship is in the middle of the channel, the suction is the same one on both sides and there isn't an issue, but when the vessel gets to the side to one side or the other, there becomes an imbalance in the suction and the suction closest to the canal bank is greater than the suction to the side, that's in the center of the channel.

So there's this imbalance and the bank effect tends to draw the vessel closer to the bank. And closer to the bank to the point that it will touch the bank. And this particular case, watching the AIS simulations, it seems that the vessel was initially close to the right-hand bank, and then she swerved across to the left-hand bank.

And then the minute before she grounded she was very close to the left-hand bank and she swerved across to the point that the stern almost touched the bank. She rode across to the right. Yeah, and to me it seems a very clear example of a bank effect that caused the swing to starboard, to the point that she wasn't able to correct. And her nose or bulbous spot touched the right-hand bank. The main contributing factor to bank effect is speeds. The faster a vessel is going through the channel, the greater, the greater, the suction, the greater, the pressure, and the more difficult to control it.

So when you combine the effect of the wind effect, pushing it to one side and the imbalances of forces within the channel, I think it's a fairly clear case that's what the cause was.

Anders Schulze : Thanks, David. Super insightful. Obviously, this was quite the location to say the least, but how would you compare this salvage operation relative to some of what you've seen in your time? How big of a deal was it really?

David Stirling : a technical perspective. it's a fairly straightforward operation, but we're in a canal in a very calm environment, no passing ships, no weather, no swell. Some gusts of wind, but nothing that would hamper the operation from working full speed. So technically it's quite straightforward. The difficulty is the vessel was wedged as she buried her bulbous bow in one bank and her stern and slid up on the other. And usually in a grounding situation, one end is free and the tugs connect and work the stern back and forward overcoming friction and slowly working away.

But of course the canal was such a limited maneuverability for the tugs we didn't have the option to connect to the stern and they didn't have the ability to develop momentum and move back and forwards. So it really became a case of they had a few options available to them.

They were fortunate in that the vessel ran aground on a neap tide. For the mariners lost us the neap tides. are the lowest tides during the month and the spring tide are the highs. So having run aground on the neap tide, the salvers were aware that seven days later, the tides were going to be 50, 60, 70 centimeters higher, and mother nature would help give 10,000 tons of buoyancy to refloating. I had it been the reverse, running aground on the spring tide, that could have been two weeks before the tides reached the same level again, before the vessel could be refloated.

So really the only two options at the time were to dig away at the canal and remove the ground that was holding the vessel in position or to remove containers. And removing containers, in my opinion, was a nightmare scenario because of the availability of cranes of that size to reach to the top containers and remove them, it was very remote. That such a crane would be available at short notice.

So I think to a certain extent there was a good deal of luck involved. Salvers were fortunate that they were in a good location and were able to develop the plan that they did without having to bring in large amounts of expensive equipment.

Anders Schulze : Indeed. We all appreciated that log right there and the timing of the tide. Thanks for sharing David, super insightful. Let's pivot to you Nathan, while this was resolved faster than some had foreseen, the aftermath now is staggering. Help us understand what's what's going on out there.

What’s the Aftermath?

Nathan Strang : Yes, absolutely. So obviously as the vessel is stuck, and the canal was closed, vessels that were scheduled to transit were still arriving. So we saw about six days worth of vessel backlog at the Suez as you mentioned earlier. It amounted to about 500 vessels of all different types from container ships to livestock ships, to oil tankers. At about day two a couple carriers decided to reroute vessels, 27 vessels on both sides of the canal. They decided to reroute around Africa via the Cape of Good Hope. That actually increased the transit by about seven days, but it helps things at the canal by pulling away that many more vessels that have to get through.

So that actually helped things a little bit. In the near term though, what's going to happen with that is that we're definitely going to see bunching at European ports. As you can see on the right side of the slide there, the ports are already backed up due to vessel bunching and arrivals.

The ones going through the Suez ought to naturally spread out as it takes time to clear that backlog, it's probably going to take through the weekend to do that, but the ones coming around Cape of Good Hope are going to show up at about the same time. It's about 200,000. TEU all showing up within a couple of days of each other.

What might happen there due to the bunching due to the fact that these vessels are delayed anyways every vessel is going to be delayed at least a week. You may see reduced time in port to try and recover those schedules. That's going to lead to export cargo and empty equipment being left behind. And then that's going to lead to more longer-term delays. So delays on Europe and East coast services. We've already seen indications of blanking on other trades. So the Far East Westbound, as many on the call are aware is one of the more expensive as far as cargo prices go. So carriers may start blanking transpacific routes, transatlantic routes in order to recover those Far East, the more lucrative Far East routes.

Maersk also last night announced that due to these equipment imbalances and just trying to get vessels back on schedule, that there is a booking stop for their spot cargo. I don't know if other carriers will follow on that. Maersk seems to be particularly impacted by these delays, but that is something we need to look at going forward and keep a very close eye on is what's going on with equipment at origin and what's going on with blank sailings and the booking stops.

Effectively this means a reduction in Capacity

Anders Schulze : Thank you, Nathan, super insightful. So essentially, this means capacity reduction across the board, both in terms of vessel capacity, and equipment. As Nathan just told us if there will be domino effect in terms of vessels getting back to Asia and the equipment situation is already somewhat critical. We have known that for months, we were literally just, seeing light at the end of the tunnel with the equipment availability increasing and now this curve ball would just prolong that situation. Right here, we have taken a snapshot on the westbound capacity outlook.

You can see that the coming weeks in terms of the vessels leaving Asia, not too much of an impact, but once we see the ripple effect of the delays we will expect to see more capacity reductions. In the red right here you can see the expectations the weeks ahead. In some weeks we could foresee potentially as much as 30% capacity reductions on the Far Eastbound Trade alone.

What to expect going forward?

So it's quite dramatic and the best recommendation from a Flexport perspective is to book as far out in advance as possible. When it comes to placing the shipment's bookings and be as flexible as possible when it comes to equipment sizes and and ports of loading.

The best recommendation is to follow the updates on a daily basis. The situation is quite fluid and as Nathan just mentioned this will not only impact US East Coast and the far east westbound is now going to be somewhat of a shared global burden where the carriers will try and optimize both their vessel space and equipment flow globally. Back to you David to learn a bit more about what to expect going forward in terms of canal operations, vessel requirements and so forth.

David Stirling : Thank you. Yeah. On slide seven, the 50 years of container ship growth. It's interesting to note the very first vessel shown there, the Encounter Bay was the sister ship to one of my very first ships when I went to sea. And back in 1976 1500 TEU container ship was the biggest ship I'd ever been on.

What’s Next for Global Trade?

And when you compare that to the sort of 2017, 20,000, 21,000 TEU mean the difference in sizes is quite staggering, really. The left-hand column also the American New York 1984 built is the same size as the APL Panama, which grounded in Ensenada in 2005, 2006 and that was one of the biggest ever salvage operations of a container ship. I think it's still the biggest salvage award in history as far as I know. But no, just listening to Nathan speaking and looking at the costs of the salvage operation and the compared to the costs of the delays and the liabilities, there's a real imbalance here.

As a ship has three types of insurance there is hull and machinery, which covers damage to the ship. There is cargo insurance. There's loss of cargo and there's third-party liability, which is pollution, wreck, removal delay claims, obstructions, and so on. I'm taking a sort of very conservative value of what the salvage cost might be. I would estimate $20 million, probably not more than that. But when you look at the reported figures for the liability claims I've heard between $150 million and $250 million for delays and obstructions. So there's a huge imbalance in the cost of the salvage and the cost of the claims. And of course the liability claims are paid by PNI underwriters.

And they really don't have a say in the salvage operation when they're the ones who stand to de-risk the most in this type of incident. And my feeling is that the liability underwriters need to become more proactive instead of sitting back and saying, no, we'll let the salvors get on with it. And the hull and underwriters should be paying. But faced with such losses and costs, I think the the liability on underwriters of P&I clubs have to step in and becoming and become more proactive in what salvage services that are available, especially in critical areas like the Panama canal, the Suez canal, Malacca straits, where traditionally there isn't a great deal of salvage equipment standing by and, for a relatively modest amount, they could they could have a stockpile of salvage equipment and high capacity, winches and pullers that could be deployed in a few days. And we would save millions of dollars a day in potential claims.

And I think that's something that's very easy for the P&I clubs to do because the P&I clubs have what's called the international group. The 13 main P&I clubs, which cover 90% of shipping around the globe, the international group and they, their ship, their members are represented there and they have pooling arrangements and reinsurance arrangements, and they do cooperate under a commercial lid very closely. But it needs a bit more coordination and preventing casualties happening in the first place and having a fast response capability. When the worst has happened. In this particular case, we were lucky that it was never going to be a very long operation.

It was always going to be dictated by the time of the tides, but had it happened a week later, the operation could have taken two or four weeks. And if we have a quarter of a billion dollars worth of delay claims, so for a seven day shutdown in the canal I can only imagine what the claims should be for a four week shutdown.

So they are, the underwriters are the ones best place to, to prepare for the next event? I don't think the Suez canal authority has a great deal of interest because the regulations for the Suez canal, pretty much said they're scot-free if anything happens, it's not their fault. If you could prove it's their fault, they don't have to pay anyway. So they have nothing, no, nothing to lose in a major event like this.

Anders Schulze : To your point David around had it not been for the tide this could have, dragged out for four weeks, literally. How to prevent something like this happening in future would the Suez canal authority, thought to expand their canal, widen? What do you think is going on?

David Stirling : Yeah I'm not entirely sure of what's going on, but the last time I went through the Suez canal, we were towing a submersible. Rick from Korea to the North sea and the canal require you to have a minimum speed. We had nobody go into the anchorage of Suez and we had to do sea trials to show that we could achieve a minimum speed of seven knots because of the canal.

They work a convoy system and you have to have a minimum speed to keep up with the convoy. Otherwise you're delaying the convoy going in the opposite direction. For a vessel like the Ever Given the best rate to avoid something like this happening is to reduce speed and, it's there's a conflict of interest so that you're slowing the convoy down in order to be more safe and will take a bit of a hard sell, I think, to convince grand Suez canal authorities to go for a solution like that.

Because of the size of the ship there's not much more you can really do and having escorting tugs isn't going to help because everything happens so quickly. The tug will not be there in the right place at the right time to stop it from happening. And a ship that weighs 200,000 tons traveling at eight knots being propelled by an 80,000 horsepower engine has an awful lot of momentum and takes a lot of stopping and when there is an obstruction that just grows straight up. Unfortunately, the banks of the canal are sloping. So it's not like bouncing off a wall, you ground and you get pushed further and further out to the water until I'm told your momentum is lost.

And traveling at eight knots. It's a difficult speed. At eight knots your bow thrusters aren't effective. And a vessel, when it's steaming ahead, it's pivot point is about a third of the way from the bow so a small corrections of the bow, large corrections at the stern. So if you deviate one meter at the bow and you try and correct, you have a two meter deviation at the stern. So the whole nature of ships in the way they work means it's very likely that, A wide ship in a narrow canal is going to get too close to the one bank at the stern and lose control.

And I certainly don't think this is a one-off event. It's going to happen again in the future, just the right or the wrong combination of weather and speed and vessel size and where it is in the canal. Some sections of the canal are quite narrow when you get up into the bitter lakes, it opens up and becomes less, less confined.

I believe that there needs to be management rules and procedures. And it's maybe a case of, Oh one convoy, every two or three days is large vessels. So it could weather restrictions on large high side vessels like crossing the bridge. If you have a high sided truck and you're going across the Golden Gate Bridge in a storm there they'll restrict the size of vessels that are allowed to go across until the wind drops a certain level again. But of course, for container ship operators and charters , they run very tight schedules and they know 14 days in advance, what time they're going to be arriving at the pilot in Rotterdam and having the uncertainty of whether the restrictions and offering a canal transit would really mess up schedules quite considerably. I think so.

So I don't see any obvious answers at the moment, but there's a lot of questions arising from this, and it will be interesting to see what the canal authority and shipowners and other underwriters decide as the most appropriate solution.

Anders Schulze : Indeed. That will be very interesting to follow. What's your perspective here, Nathan? Do you think that we'll go back in time, shrink the size of the vessels and eventually see small vessels again to prevent this having going forward?

Mitigating Supply Chain Risk

Nathan Strang : I don't see the vessels getting smaller, I think for the economies of scale , it just makes sense, especially on the far east westbound to have the larger vessels there, their costs per mile allows them to be more profitable. Also we have to look at the IMO regulations around emissions. The easiest way to address things like IMO 2020 and IMO 2050, and the reduction of emissions is bigger vessels.

So a larger vessel, a 24,000 TEU vessel emits more than a 10,000 TEU vessel on a vessel per vessel basis, but not a container for container basis it does not. So it allows them to meet their restrictions it allows them to meet their economies of scale and to, and what do they want to optimize for? In business they want to optimize for profit and also want to keep rates low so people keep booking and meet all their regulations. And as of now, the easiest way to do that is these super large vessels

Anders Schulze : Makes sense. Talking about mitigating a risk having a resilient supply chain. What are your best recommendations going forward Nathan for any shippers out there?

Nathan Strang : No, I think David hit it on the head as well when he said that this was, this is going to happen again, and we've seen it happen before and we've also seen it in other ways. Panama canal has restrictions every time there's drought and the water gets low. We've seen the backups here in Los Angeles and on the West coast of the United States. Rotterdam, as we mentioned before, is backed up.

So the best way you can deal with this actually is to plan ahead it's to build a resilient supply chain that won't be impacted by any one shutdown. For those shipping out there, look at your supply chain. Look at the ways your vessels are going. Where are they routing? How many, how much risk do you have on any one lane, on any one service on any one carrier and really talk to your logistics teams about how you can mitigate that, how you can get ahead of it.

We have a lot of options out there now. The belt and road initiative with China rail to Europe is really taking off. You're seeing sea to air products come into the market again, where vessels will come on an expedited service into Los Angeles, and then the cargo will shift to air and fly to Europe.

I think all of those things are really important to look at. And you should take these opportunities where you have an incident like this to meet with your supply operations teams, to meet with your logistics providers and say, what does my supply chain look like? Where are my risks and what can I do to mitigate them? And that will ensure that anyone shut down, won't shut down your total supply chain.

Anders Schulze : David, Nathan, this was super insightful. Really appreciate it. Have a great day everyone out there.